Looming Student Loans: How to Get a Debt-Free College Education

“The chief value in going to college is that it’s the only way to learn it really doesn’t matter” – George Edwin Howes

For most Americans desiring a higher education, borrowing has become the primary way to pay for that college degree. Flip open any money magazine scroll through a personal finance blog written by the typical twentysomething and looming student loans are often the topic of the day.

Here are a couple of examples. Mrs. Micah at Finance and Life explains:

I’m a 22, recent college grad who just got married this summer. Along with getting a brilliant and loving husband, I acquired $100,000+ in student loan debt (which he acquired for the 10 years of school in getting a PhD.), $8,000 in car debt and $800 in credit card debt.

The bloggers at We’re in Debt are another young couple in a similar situation:

Going to school for more than four years has not been kind on our finances. With school comes the inability to work real full time jobs. As one of us went to graduate school, this led to a three year period in which one of worked and the other went to school. We have finally settled down into the real world of our career jobs with slightly over $150,000 in debt. While we have worked 40 and 50 hour weeks for the last four years, the debt still continued to grow unabated. We have pumped every dime that we could earn into paying our debt, but it’s still there and is hindering our futures.

Their student loan payoff ticker is currently totaling $139,615. Ouch! That’s a small amount compared to these young doctors with a $500,000 tab. Double ouch!!

Debt is one of the most complex four-letter words in finance. One person’s $10,000 IOU burden is another’s $10,000 borrowing deal. At The Motley Fool we differentiate between “good” debt and “bad” debt. “Good” debt tends to carry these common attribute: a low, fixed interest rate and the likelihood that the asset in which debt was used to secure will appreciate in value over time (e.g. a house). “Bad” debt is identifiable by high, non-fixed interest rates and being used to buy things that lose value over time (like cars and pretty much anything you put on a credit card).

While student loan debt is not a tangible asset you can sell off at a gain, it does tend to carry the attributes of “good” debt — something worth borrowing money to obtain. You get an education because it will improve your future job prospects, earning potential, and, heck, maybe even widen your dating pool.

But, unfortunately, many graduates feel burdened by this “good” debt. I asked Anya Kamenetz, the author of Generation Debt how twentysomethings became the most indebted generation in modern history and she answered:

Take your pick: a shift in federal policy from student grants to student loans, the liberalization of credit laws, increased consumerism, the failure of the health care system, a globalized job market with more short-term jobs and fewer benefits, fiscal irresponsibility on the federal level, and a failure to address a demographic shift that’s gonna leave America with the same ratio of elderly people that Florida has now.

There’s been an explosion in private student loans over the last decade. It’s a broken system when families and students need to resort to these options — some of these loans have interest rates as high as 19-20 percent.

Jeanine and I both have nieces getting ready to embark on their college experience. One comes from a set of parents that have been planning for this expense since her birth; the other has parents that intend to wing it. I fear what this means for her future.

Yesterday, Suzanne S. wrote a guest post over at Get Rich Slowly that is lovingly addressed to her goddaughter, a recent college graduate:

Debt is your enemy because it’s a trap. It’s hard to get out of it. If you can only afford to pay the minimum balance, debt can very easily spiral out of control. It can take away your freedom to make the best decisions for yourself.

If you are one of the 50,000 students who graduated with debt in the UK in 2007, do everything you can to get out of it fast. According to reports, students are facing an average “debt sentence” of 11 years, and 35% will postpone starting a family, marriage, or buying their own home by an average of six years.

So what’s the solution? The blogger at Punny Money offers up Ten Ways to Get A Debt-Free College Education and while I disagree with Number 5 (have your parents take out a home equity loan to pay for your education), the rest are really solid suggestions.

Are you in college or a recent grad — what’s your story? I’m always interested in having a conversation below.

P.S. I managed to make it through school entirely debt-free by getting lots of scholarships over (80% of tuition), an inheritance from my grandfather, and some money from my parents for living expenses and other college fees. So pretty much what Nick said.

And rich older people, setting up college trusts for your grandchildren is a wonderful gift!!! (Just make sure they can be used if the kid doesn’t end up going to college. Say, if they’re 25 and haven’t used them they just get the money.)

I don’t have as much debt as the cases you listed, or the most of the people I know from school, although I’m pretty well above average. My minimums take more than 20% of my net, which is manageable–mostly because it has to be, I flex my flex expenses until it all fits.

I have so many thoughts and stories about this debt to sort through. I think it’s summed up by the confusion about the good/bad debt line–it’s easy to see that a (fair, fixed) mortgage is a good debt and that oppressive consumer debt is a bad debt. But student loans depend on so much–is that education earning you a salary that makes the debt worthwhile? Are your loans subsidized, unsubsidized, private? Are you putting off buying a house–and then holding your mortgage for longer–and then saving less for retirement?

We get to be the guinea pig generation–will we make it work or will we change the system? I guess we’ll find out in 25 years or so….

I just took a job at the university I attend. It covers up to 12 credits per year for the tuition, it’s part of a really great benefits package. It even gives allowance for graduate school. This will totally help to keep my growing Student Loan debt to a minimal 60K. Hopefully, I can get into the law school here, this way it can be partially paid for!

I’ve got about £12k in student loan debt and I just don’t think about it. The interest rate is sufficiently low that it really shouldn’t be paid off quickly, and the minimum payment is also low, so it doesn’t impact my budget too much.

Great Post! Definitely a topic I’m interested in these days. Up until grad school, I was able to figure out how to get my entire education for close to free. I went to a smaller school my first two years because they paid me to play on an athletic team. Then, while finishing up at the University of Washington, I worked part-time for a corporation that offered tuition reimbursement. My benefits package also offered small loans, and I took one of these out to cover additional expenses. Over the course of the next four years, my employer paid half of this loan back for me. Many companies definitely have such benefit perks these days and it’s a great deal. I’ve had to break my winning streak and borrow for grad school, but Federal student loans are definitely the least of the evils.

Mrs. Micah: The majority of twentysomethings are financially illiterate so you’re way ahead of the pack by learning to live within your means. Awareness is is the first step… I’m confident you’ll get his big student loans paid off.

Melissa: Instead of being called a millennial or Gen Y… you’ve coined a new moniker – the guinea pig generation! Paying off the student loans will be one big experiment for your generation.

Plonkee: Like you, I graduated with about $10,000 in student loans and it was manageable at the time. Unfortunately, most graduates these days aren’t in the same boat.

Dreamy1: Excellent strategy!

Aundi: I love hearing thrifty ways that people made it through school without incurring a lot of debt. Since undergrad allowed you to be debt-free, it makes grad school loans seem less daunting!

Well, my parents paid for my education til they kicked me out. Then I was pretty poor for a couple of years while I attempted to work and wait out the birthday restriction for the FAFSA, which happened for this school year. Being poor and taking up an RA-like job means that my entire need (a little over $18,000)is covered and only $2500 of that is loans (it would’ve been less if I hadn’t applied for an increase so I could buy a computer).

Of course I’m thinking about an expensive study abroad program that would probably send that relatively small loan balance soaring, but it’d also be really valuable to my school career and future research, so, yeah. I’m still applying for scholarships, to get the loan balance down even lower/for future schooling costs.

After I graduate, I’d like to do Americorps, get the educational award that forces me to pay some school debt and some useful experience to boot (as well as a leg-up into fed jobs, which I feel ambivalent about politically, but are a good choice financially)

And for grad school, I’m thinking fellowships or assistantships will help significantly with tuition.

The idea of owing somebody something is seriously uncomfortable for me on a personal level, so having to live in the reality of school loans (even with the shiny new legislation) is freaking me out a little.

Tab: Maybe others could weigh in on this point… but I would shy away from expensive study abroad programs. In this age of the global economy, you might consider work that allows you to see the world. In my opinion, it’s better to do this on someone else’s ticket. Plus, when you’re doing business in these places, you’re more exposed and interact with the local culture than if you were a tourist or traveling student.

…student loans for anyone looking to finance their education
…college apps, especially in this “new media” world
…personal finance in general
…and some tech-y stuff if you’re way into the blogs and podcasting and whatnot